View: It's a daft ecommerce policy, will harm future local etailers

On business matters, governments think wrong and do wrong frequently. They think right and do right a few times. And sometimes they think right but do horribly wrong, like in the draft ecommerce policy.

GoI wants locally-owned, locally-managed ecommerce success stories. That’s right thinking. But the draft policy goes about this spectacularly wrongly. If this is the final policy, India won’t get what it should, and will lose what it has.

What India’s ecommerce market has is plenty of foreign investment. What it should have, while keeping foreign investors interested, are locally owned and managed competitors to firms backed by outside capital.

Given this, the draft is really smart on only one count – the suggestion that startups can issue shares with differential voting rights. The aim is to provide Indian founders of successful online ventures more control over companies they have built even if foreign investors have put in most of the capital. So, a share owned by a founder will carry more weight than, say, a share owned by a Chinese venture capital firm.

Shareholding structures that restrict voting rights of foreign investors are not unusual. Some hugely successful startups in the US and China, the world’s two largest internet economies, have shareholding rules that allow founders with minority stock to call the shots.

Will large investors lose interest if they can’t be the boss of a company they put money in? Not at all. As is the case in China and the US, India can attract large investors in ecommerce under rules that favour more control for local entrepreneurs, provided the returns on investment are potentially high.

So, that was good thinking. Now for the really bad bits of the draft policy – socialism-type restrictions on pricing strategies, a completely needless additional layer of regulation, silly dos and don’ts on what can be sold and how, etc, etc. Space for this column is limited, and silly suggestions abound in the draft. So, we will pick just a few examples to demonstrate our argument.

Take the recommendation that deep discounting – selling goods really, really cheap – must be thoroughly discouraged. This seems aimed principally at pricing strategies of Amazon India and Walmart-owned Flipkart – two American giants.

Of course, Amazon India and foreign-investor controlled Flipkart use capital available from abroad to sell stuff really cheap. And of course, that’s one of the big reasons they control nearly three-fourths of India’s online market. But even locally-backed and locally-managed online shops would want to do the same thing.

Deep discounting is a universal ecommerce strategy. It’s employed to win customer loyalty, more so in markets where online commerce is still a small part of overall retail. India’s online retail is just 3% of total retail sales. Therefore, a policy that targets discounting will actually harm future local entrepreneurs.

People who made this recommendation forgot basic economics, which is that government intervention in pricing, especially in consumer market pricing, always ends up disastrously. Local startups won’t flourish if they as well as Amazon and Flipkart can’t sell products cheap.

A smarter way to level the playing field against deep-pocketed foreign investors who can afford deep discounting is to have a policy that allows firms to offer steep price cuts only when all or most of their capital is locally sourced. This will truly discourage capital dumping from abroad, without ridiculous inter-ference in firms’ pricing strategies.

But won’t that be unfair to an Amazon or a Walmart? No. They are free to offer deep discounts but the capital deployed in Amazon India or Flipkart must be raised locally. They will compete with local firms for capital, and they may actually attract more investor interest. But that’s wholly fair.

Amazon or Walmart won’t like it. But they will have to balance their loss of the capital dumping option against giving up on one of the world’s most exciting online marketplaces. That’s smart policymaking.

Terribly unsmart, too, is the draft policy’s idea of a new regulator for ecommerce. Governments love new regulators by instinct, and also because bureaucrats who make policy know every new regulator means a bunch of nice jobs for retired administrators.

Why do you need a new ecommerce regulator? All transactions in an ecommerce play are covered by existing laws. If there’s a contractual violation by any party in the buy-sell chain, there are consumer courts and courts. If there are disputes over, say, shareholding patterns in a listed startup, there’s Sebi, the stock market regulator. If there are questions over data storage, there’s a new law on data protection coming up.

Indeed, that the policy suggested data storage norms different from those suggested just days before by the Srikrishna committee seems to suggest those writing the draft were in some other world.

In this world, an ecommerce policy for India shouldn’t be a nanny state in dotcom disguise. Indian startups need a few regulations, like those against capital dumping, and a committed government push to creating an environment rich in capital-raising possibilities. It’s the lack of local capital that’s holding back creation of local champions. But guess what? The draft policy has almost nothing to say on this.